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If you think inflation that gets out of control is bad, just wait until the cure hits.
The Federal Reserve raised the interest rate on the money it lends to other banks by.75% last week. This was the biggest increase in interest rates in 30 years. Jerome Powell, the head of the Federal Reserve, said that the increase is needed to stop inflation from going through the roof.
In the coming months, he wants to go on more hikes. They will cause the interest rates on credit cards, home-equity loans, car loans, and mortgages to go up. It hits people in the gut who need to borrow money.
Get ready for the average interest rate on your credit cards to go up from the current average of 14.6 percent to more than 20% in two months.
When you're looking for a house or car, lower your expectations. You'll be able to pay less than you thought you could because the interest costs on your monthly payments will be much higher.
The Fed has no choice but to do something. In fact, it waited too long. The Fed's job is to keep prices stable and keep everyone working. Last week, inflation hit a new 40-year high.
A report from the Federal Reserve Bank of San Francisco found that inflation is happening in some other developed countries, but it is much worse in the United States than in other developed countries. The country has a lot of cash because the government has spent too much.
During the pandemic, Uncle Sam put money into people's bank accounts, and when COVID lockdowns ended, they went out and spent it. That made prices go up. Now, those freebies are making inflation worse.
Steve Rattner, who worked in the Obama administration and is now an investment banker, says that if the Federal Reserve had acted sooner, the rate hikes wouldn't have had to be so big and the cure wouldn't have been so painful. He says that the Fed was "very slow for no reason."
Karen Dynan, a Harvard economist and former Treasury official, says that the next few months will be full of "general pain." Seth Carpenter, global chief economist at Morgan Stanley, warns that the change will be hard. He also says that it takes a long time for inflation to go down.
The Biden administration and its allies are not telling you the truth about this. Sebastian Mallaby, a supporter of Biden from the Council on Foreign Relations, wrote a column for the Washington Post in which he called the Fed's rate hike "courageous" and praised President Joe Biden for backing Powell.
Prices are likely to stay high for the next few months. It will be impossible to borrow enough money to pay these higher prices and keep the family going.
Suze Orman, a financial advisor, wants people to pay off their credit card debt and live within their means. Easier said than done. The average household has to spend $450 more each month on food, energy, and other basic needs than they did last year.
The mortgage rates are the highest they've been since 2008. Last week, the cost of a 30-year fixed-rate mortgage hit 6.28 percent, which is almost twice as much as it was at the end of December.
During COVID, the Fed did things to make mortgages as cheap as possible, but now it is going in the opposite direction. Powell says that the housing market needs "a little bit of a reset." Prices should go down, but it will cost more to borrow money.
The Fed's strategy hurts people who want to borrow money. But savers come out on top. If you have some money saved up, you can shop around and probably get much better interest on it.
Something else is job security. Last week, protesters in Washington, DC, gathered in front of the Federal Reserve building wearing T-shirts that said "Full Employment Defenders." They said that slowing down the economy could put low-level jobs at risk. Larry Summers, a former Treasury Secretary, also says that bringing inflation down is unlikely "without a large increase in unemployment in the near future." Maybe, but unemployment is still very close to all-time lows right now.
Many people will have hard times in the next few months.
This weekend, Biden told the Associated Press, "People are really, really down." I apologize, Mr. President. Do not cry like a crocodile. What we need is for prices to go down a lot.
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